Question

Safety-Kleen is a North American company that offers environmental products and services. The company issued a major financial restatement in 2001. In 2000, the company’s board of directors initiated an investigation of possible accounting fraud within the company. The next year, Safety-Kleen restated (reduced) previously reported net income by $534 million for the period 1997-99. In the week surrounding the announcement of Safety-Kleen’s investigation, the company’s stock price dropped over 70% and its auditor, PricewaterhouseCoopers (PwC), withdrew its financial statement audit reports for the previous three years. PwC agreed to settle a shareholder lawsuit for failing to discover the fraud in the amount of $48 million. PwC said the audit firm admitted no wrongdoing but settled to avoid the uncertainty of a trial. Do you believe that financial restatements and withdrawing an audit report are prima facie indicators that a failed audit has occurred? Explain why or why not.